Abstract

This article reports on a marketing initiative at a pharmaceutical company to redesign its distribution network. Distribution affects a firm’s cost and customer satisfaction and drives profitability. Using a nonlinear mixed-integer programming model, the authors develop a distribution network with a dual emphasis on minimizing the total distribution costs and improving the customer service levels. Specifically, they address the following issues: They (1) determine the optimal number of regional distribution centers the firm should operate with, (2) identify where in the United States the firm should locate these distribution centers, (3) allocate each retailer/customer distribution center to an appropriate regional distribution center, and (4) determine the total transportation costs and service level for each case. Finally, they conduct a sensitivity analysis to determine the impact of changes in problem parameters on the optimality of the proposed model. This marketing initiative at the studied firm reduced the total distribution costs by $1.99 million (6%) per year, while increasing the customer on-time delivery from 61.41% to 86.2%, an improvement of 40.4%.

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